I am writing you this memo to help you comprehend the concept of the time value of money. You hinted to me earlier that you have been having difficulties explaining what the above concept is to the customers who wants to invest their money.
Time Value of money is a financial principle to ensure money is available now is worth more that the equal amount of money in the future, since money has the potential to earn more if the present funds are committed to any venture that could earn interest. This is simply to mean that Money has an attached value. This further means that every dollar today is worth more than its previous value in the time before.
There are five variables that account for the time value for money:
- Firstly, there is the present value which is the current value of money that one would want to invest.
- Secondly, there is future value referring to the value of current money in time to come in as far as it grows and earns interest.
- Thirdly, the number of periods; ...